Anti-IMF Stand Forgotten When Cash on the Line: Argentina Credit

Argentina, which the IMF censured for underreporting
inflation less than three months ago after three warnings over
the past two years, last week authorized the deposit of $400
million with the Washington-based lender to increase the
nation’s access to emergency cash. The move will boost
Argentina’s special drawing rights that currently total $3.2
billion and comes as reserves, Fernandez’s main source for bond
payments, declined to a six-year low of $39.8 billion.

Fernandez, who has also criticized the IMF for causing the
country’s record $95 billion default in 2001, is using the bank
to bolster her dwindling supply of dollars as a decade-long
legal dispute with holdout creditors and her increasing
influence over the economy leaves Argentina as the world’s least
creditworthy debtor nation based on swaps trading. With overseas
borrowing costs at 13.92 percent, Argentina hasn’t sold bonds
globally in over a decade, prompting Fernandez to tighten
capital controls and ban most dollar purchases.

“They’re doing this because they’re worried, and the
special drawing rights helps them have more liquidity,” Claudio Loser, a former IMF director who now heads research firm
Centennial Group Latin America, said by telephone from
Washington. “Once the drawing rights are approved, they can use
the money practically immediately, like cash.”

IMF Reforms

Fernandez’s spokesman Alfredo Scoccimarro didn’t return an
e-mail and telephone calls seeking comment on whether the
government plans to use the drawing rights.

The planned increase in Argentina’s deposits with the fund
is in response to the IMF’s 2010 call for increased
contributions from members as part of a “package of far-
reaching reforms of the fund’s quotas and governance.”

The IMF proposal still needs the approval of the U.S.
Congress.

Argentina used its special drawing rights in 2000, 2001 and
2003, fund data show. In January 2006, Fernandez’s late husband
and predecessor Nestor Kirchner paid back the country’s $9.5
billion debt to the fund, saying he wanted to be free of the
IMF’s “dictatorship.”

South America’s second-biggest economy also received as
much as $2.7 billion in a general allocation of funds by the
lender in 2009, returning them by the end of that year. It
currently owes nothing to the IMF.

No Improvement

Fernandez has tapped more than $30 billion of central bank
reserves since starting to use the funds to pay foreign debt in
2010. The following year, she banned most purchases of foreign
currencies to stem capital outflows.

JPMorgan Chase & Co estimated on April 18 that reserves
will plummet to $37.5 billion by the end of this year, the
biggest drop in a decade.

An increase in drawing rights won’t improve Argentina’s
creditworthiness or reduce its borrowing costs, according to
Aldo Pignanelli, a former central bank president. For that to
happen, the government needs to reduce its fiscal deficit, which
increased last year to the widest since 2001, and improve the
accuracy of its statistics.

Investors demand 11.96 percentage points more to own
Argentine bonds instead of U.S. Treasuries, leaving the nation
as the only distressed borrower among 55 emerging markets
tracked by JPMorgan.

Default Swaps

The cost of protecting $10 million of Argentine debt for
five years using credit default swaps rose 100 basis points, or
1 percentage point, to 2,239 basis points yesterday. That’s the
most expensive of any country in the world and more than twice
as high as Cyprus, which agreed on March 25 to a 10 billion-euro
($13 billion) loan from the euro area and the IMF after the
nation buckled under the weight of its financial industry.

“Spreads can drop if the country improves credibility and
begins to do the right things,” Pignanelli, who now runs
economic research firm Saver in Buenos Aires, said in a
telephone interview. “The way we are going, we’ll never be able
to reduce rates.”

In February, Argentina became the first member country to
be censured by the IMF for not providing accurate data on
inflation and economic growth under a procedure that can end in
expulsion. The government’s data has been questioned by
economists since early 2007, when Kirchner changed personnel at
the statistics agency.

Inflation Data

Consumer prices rose 24.4 percent in March from a year
earlier, according to a report by opposition lawmakers that is
based on estimates by independent economists, who face fines if
they release statistics that differ from official data.

The statistics agency said inflation was 10.6 percent in
that period.

The fund set a Sept. 29 deadline for the country to take
“remedial measures” to improve the accuracy of the data. If it
fails to do so, the lender can apply further sanctions, such as
suspending its voting rights and barring the country from taking
loans. The final step is “compulsory withdrawal.”

A central bank official, who asked not to be named because
of bank policy, declined to comment on how an increased deposit
with the IMF would affect reserves or if it planned to use the
special drawing rights. An IMF official declined to comment when
contacted by Bloomberg.

‘Yellow Card’

When IMF’s Managing Director Christine Lagarde said on
Sept. 24 that the lender may give Argentina a “yellow card”
for failing to improve inflation data, Fernandez responded that
the lender has always “picked on” Argentina.

“The IMF considers us a bad example, a bad pupil, we are
the ones that said ‘no’ to each and every one of its recipes
since 2003,” Fernandez said on Sept. 26 at Georgetown
University while on a trip to Washington. “We don’t have
anything against the IMF ideologically, but it led us into
Argentina’s worst-ever tragedy.”

Since Kirchner’s break with the fund in 2006, Argentina has
been the only Group of 20 nation that hasn’t allowed the lender
to review its finances, which is mandatory for all.

If the U.S. approves the proposal, Argentina will be
eligible to receive sufficient funds to ensure that it can
maintain debt payments over the next few years, according to
Alfonso Prat-Gay, an opposition lawmaker and former central bank
president.

The government “is just trying to grab $1.6 billion so
that it can take it easy, perhaps until 2015,” Prat-Gay told
the lower house of congress on April 17.